Equally loved as it is hated, Google (GOOG), or Alphabet (GOOGL) if you prefer, continues to put up strong fundamentals while in the midst of antitrust challenges and bad PR regarding its diversity standards.
The tech behemoth can easily and quietly ratchet its share of the search market up or down by pushing more or less revenue within a few percentage points of growth. Currently, it’s estimated Google owns more than 80% of the search market. While they could easily go out and capture the entire market, they don’t due to regulatory worries of being a monopoly. As it is, the company was fined $2.7 billion this summer in an European Union antitrust ruling that found it favored its own services over those of competitors.
After years of refusing to release their minority hiring statistics, claiming their hiring practice was a trade secret, Google did begin doing so in 2014, and the numbers weren’t pretty. Three years later the data still shows the company is largely male and white, and that progress has been incremental at best. The recent hire of a new VP of diversity is hoped to help with that issue.
Despite all this, the company continues to report strong fundamentals each earnings season. In the last eight quarters (Q3 2015 through Q2 2017) the giant has put up double-digit earnings per share (EPS) growth in five quarters, slowing more recently due to increasingly difficult year-over-year comparisons. Revenues have grown 15% or more over the same time period, an incredible feat considering this is a company with a market cap of $650 billion. And there is no sign of that slowing down with revenues expected to stay in the double digits for the next four quarters.
Of course the main engine of revenue growth for Alphabet is through advertising, which regularly sees year-over-year growth in the mid to high teens (see “Google growth”). Google investors have started to see the advertising business as a sort of technology REIT, knowing that cash flow will remain strong each quarter. Paid clicks have also remained strong this year and as such the company’s cost-per-click continues to decrease.
These numbers need to continue to be strong if they are going to justify the high valuation. Alphabet now trades at the highest trailing four quarter EPS and revenue multiples of the past five years. With those high multiples come very high expectations of growth, which have been mostly met over that period.
With strong ad revenues comes the ability for Alphabet to invest heavily in its “moon shot” investments such as autonomous vehicles, fiber, virtual reality and healthcare. Those businesses are certainly the future of the company, and in particular many are betting on the giant to be the first to figure out driverless cars, with all of the talent they have working on that and other projects. Alphabet’s cash position and talent acquisition gives them the ability to easily scale these moon shots and develop them into stand alone multi- hundred billion dollar companies.